American Apparel Heads For Bankruptcy

In response to The Trojan Business Journal's post on the near bankruptcy state of American Apparel (AA), I have to point out that there are other reasons other than its American Made goods business model that are contributing to AA's downfall. I agree with TBJ's assessment that AA's "failure to conform to outsourcing its manufacturing operations" can be a major setback. Yet,  AA's aversion to sweat shops was its leading marketing campaign to attract the so-called "hipster cult" crowd. Now, here are some conclusions based on my own observations.

First of all, AA has tarnished its reputation when the founder Dov Charney was sued by a former worker for sexual abuse:

Last month a former worker sued founder Dov Charney, alleging he sexually abused her. American Apparel has said that it expects the lawsuit will be tossed out because the former employee signed an agreement not to sue and to settle disputes in arbitration when she left the company.
The lawsuit is the latest in a string accusing Charney of inappropriate sexual conduct with female employees. In interviews, he has acknowledged having sexual relationships with female workers, but said they were consensual.

Second, Deloitte resigned as AA's external auditor in July 2010. According to WSJ, AA's stock dropped after the announcement. Like most cases where the auditors quit suddenly, the main concern points to "retail store impairment, inventory reserves and the provision for income taxes" on the balance sheet. Based on my knowledge from accounting and business management classes, this typically happens when there is material fraud happening at the client company that Deloitte doesn't want to get involved with and/or major clash between the Deloitte team and the client head team.

Third and lastly, as the economy continues to lag indefinitely, AA refuses to drop its prices. Sure, their clothes are made of higher quality but a plain, basic t-shirt should not cost the amount that AA charges. Especially when you have giant retailers such as H&M and Forever 21 chasing after you. As the Consumerist puts it, 

Something about [American Apparel] being overpriced, bland, and enshrouded in hipster mystique and social activism really pisses our pants off.

Now that AA has completely exploited the royal consumers and destroyed its image, who is willing to pay for their overpriced merchandises? After all, not every company can get away with it like Apple can.

Failing Borders Wants to Pay $8.3 Million Bonuses to Top Execs

Check out this interesting timeline:

2/16/11 Borders filed for bankruptcy protection this morning, and said it will close at least 200 stores, plus the option for about 75 more — or about 30% of the company’s total.

3/17/11 Borders said it will close another 28 stores by late May. FYI: Here's a list of all the Borders stores that are expected to foreclose.

3/26/11 Borders announced they want bankruptcy court to approve a bonus payout of $8.3 million to its top executives, with $1.7 million to President Mike Edwards.

Peg Brickley from WSJ reported:

For Borders' five highest-level executives, the bonuses would mean extra pay of between 90% and 150% of their base salaries, depending on how quickly the company exits bankruptcy or is sold as a going concern.

The catch? The bonus won't be paid if Borders liquidates.

One investor laments the irony of the situation: "The idea of retention bonuses are killing me, but you'd have to pay a king's ransom for the next group. It irks me because it's money that won't go to paying creditors."

Borders Bites the Dust

The Wall Street Journal reports that Borders is preparing to file for bankruptcy within the next week:

Borders has abandoned efforts to refinance its debts, and is preparing bankruptcy papers and seeking financing agreements that would keep it operating during the Chapter 11 restructuring process, the people said.

Once a corporate giant, Borders had over 40,000 employees and more than 1200 stores during its prime time in 2005. Unfortunately, that is not the case today. Based on the data graph below, there's a sharp decline in both employees and stores within the last five years.

(Source: WSJ)

This is a hard blow to the book industry. As Americans eagerly embrace technology, iPad, Nook, and Kindle are ubiquitous. E-readers are doing to Borders what Netflix and videos on demand did to Blockbuster. Unless Borders can find a way to successfully restructure itself, it is only a matter of time before e-books will antiquate physical books and even book stores.

I am very sadden by the news as visiting bookstores were a favorite part of my childhood. I love to peruse through book stacks to see what catch my attention. Maybe I'm just an old soul that prefers physical books, but there's a sense of nostalgia to lounge in a comfy chair and hold a real book while reading.

Is this the end of an era?